Attempts of growth: how the Russian economy adjusted to the bad times

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The economy showed signs of improvement, but they are very sensitive to various “signals” from the government that can quickly degrade the expectations of economic agents

The Russian economy is showing signs of change: they are observed in the expectations and attitudes of economic agents. By themselves, these changes are not a guarantee of radical improvement, but can be the basis for growth, if supported by positive signals in the political sphere. As grounds for this conclusion I can bring the cases related to July–August 2016, as well as the results of research conducted by the Center for macroeconomic analysis and short-term forecasting (CMASF).

Microeconomic foundations

Case 1. The top Manager of the financial unit of a large Russian holding upon review of the statements for the first half of 2016 gave the following comment: “we are doing better than could be expected”. One possible explanation is the change of strategy in the conditions of increasing competition. In particular, their sectoral group responsible for non-food retail, went to the lower margins at the expense of what achieved increases in market share and in the end were able to increase the whole holding’s profit in its direction.

Case 2. In 2014, the Manager of large Russian companies went to study abroad, planning to return to Russia in the fall of 2016. This spring he believed that because of the deteriorating economic situation, employment prospects will be less and you need to focus on lower levels of income compared to what he had prior to departure. However, in July–August, he received in Moscow several proposals at comparable or even higher levels of compensation. His assessment on the results of informal networking with former colleagues: “For the same money people have become faster to run”.

Case 3. At the end of August in one of the leading Russian universities was summarized in a new set. With some reduction in the number of new budget-funded students, the number of “paysites in the first year increased by 60%. The last three years this University is not indexed to the cost of education inflation (as was done previously), and also slightly reduced the budget set. But these factors are unlikely to explain the explosive growth of demand for its educational program, after three years of stagnation, given that for families this is a long term commitment. Demographic shifts this effect to explain, too, is impossible: there is no surge in the birth rate in 1999 was not. The question arises: where did the family money on such investments? Or: why now, they are spending on these purposes your savings?

A view from the meso-level

Says, after analyzing the results of the first half of 2016, recorded the existence of different trends in different industries — without a clear overall growth. However, there is some recovery in investment activity. If in 2015, compared to 2013, the vast majority of industries there had been a deep investment downturn, in 2016, emerged a group of industries, which experienced a marked increase in investment (see slide 21). This applies to metallurgy, chemistry, agriculture, woodworking and the pulp and paper industry, as well as a number of infrastructural industries and service sectors.

CMASF data also show that the growth of wages in the industry: approximately 2-3% (after a fall of 8-9% in the period from mid 2014 to late 2015). However, according to experts CMASF, this process is practically not accompanied by an increase in the wage share in the proceeds, that may be an indirect indicator of increasing efficiency.

This estimate is consistent with the comments of the co-owner of a medium-sized company from the sector of electrical engineering: improving the efficiency of enterprises related to industry consolidation and active ousting from the market of less successful companies. At the same time benefiting those who invested and were invested in technological development in the preceding period.

Evaluation of a top Manager of a large state Bank also confirm the existence of growth in some sectors. In particular, the loan portfolio of the Bank in the direction of the medium business (companies with revenues up to RUB 10 billion per year) over the last year more than two times increased the share of loans to agricultural enterprises. Although, as noted by Respondent, “we don’t Rosselkhozbank and not about to become”. Loans also take the enterprises of light industry and chemistry, but there is dominated by larger enterprises.

According to this Respondent, a serious constraint to the real sector remains the problem of funding. In this regard, are important tools to reduce to the companies cost of financial resources. But the practical application of these tools very often lies at the intersection of the competences of different departments and state agencies. And here comes the powerful “bloc” associated with rampant fear, “the arrival of the prosecutors”. The necessity of any action beyond transfer paper from office to office, automatically gives rise to the question: “how do I explain it when you get prosecutors?” (Here the characteristic change of modality: is used before “if” today say “when”). This logic of interaction dramatically slows down the resolution of any complex issues and, therefore, limits the enterprises access to financial resources. The “total control” of the Prosecutor’s office in reality does not affect the extent of corruption.

A view from the macro level

In more General terms to explain the current trends it is useful a comparison with the situation of 2008-2009. In the conditions of crisis one of the main priorities for the authorities was to preserve social stability. Therefore, the government agreed to increase pensions, wages and unemployment benefits. As a result, in the fall of GDP by almost 8%, real income in 2009 increased by 2%.

Part of this policy was informal pressure on businesses by regional authorities to prevent redundancies. Such a policy is, of course, involves “exchanges” between government and business, but it is in fact notable assistance was the least efficient enterprises. At the same time centralized the increase in unemployment benefits and salaries in the public sector has significantly increased for enterprises “opportunity cost” in the labour market and limited opportunities for restructuring.

In the current crisis against the background of previous costs for the implementation of “may decrees” the regional authorities have practically no resources to support inefficient enterprises. At the same time the reduction of social budget expenditures in 2014-2015 led to lower “opportunity cost” in the labour market.

Under these conditions, increased competition and objectively began to win those firms that have previously invested in development. They have to win because they are less hampered by the state. While the continuing shortage of skilled personnel is forcing growing businesses to raise wages, and the competition pushes them to new investments.

However, all of these factors, of course, is superimposed the influence of foreign shocks, domestic policies and the forms in which the state interacts with business. In this context, the spring-summer of 2016, in my opinion, has been the psychological adaptation of economic agents to the “new reality” — with the realization of long-term tension in relations with the West and limits access to world markets of capital and technologies, but at the same time understanding new opportunities in specific sectors. This can be explained by the results of a recent market survey of the Gaidar Institute, in the course of which a very high proportion of managers of firms (74%) described the current status as “normal”.

An important factor here was the relative stabilization of foreign policy. The freezing of the conflict in Ukraine, the rapid withdrawal of Russia from the direct participation in hostilities in Syria, the localization of the conflict with Turkey — all these are examples of when the absence of bad news may itself be good news.

In these circumstances, people began to understand that “move on”. So, it is necessary to use the opportunities arising on the market to attract strong shots, invest in a good education for children, etc. To keep this trend, it is important to support the initiative of conscientious players — both in business and in the government (especially at the regional level).

To prevent growth of social tension it is important to think about creating jobs for redundant workers. But unlike the concept of “25 million new high-tech jobs,” proposed five years ago, rather it should be jobs in the service sector to employ semi-skilled workers, which now frees up the industry.

The emerging and still very weak positive trend is very sensitive to various “signals” that emanate from the government. That is why it is extremely important to avoid “sudden movements”, which are able to re-adjust to the worst expectations of economic agents.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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